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Lecture01 introduction part_1_ed_ned_board_structure_37p

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Lecture01 introduction part_1_ed_ned_board_structure_37p

  1. 1. UBML3033 CORPORATE GOVERNANCE Week 1: Topic 1: Introduction? (Part 1)
  2. 2. Topics <ul><li>The structure of corporations </li></ul><ul><li>Relationship between shareholders and BOD </li></ul><ul><li>Corporate officers </li></ul><ul><li>Concept of ownership and control </li></ul><ul><li>Definition of CG and sound CG </li></ul><ul><li>Importance of CG to PLCs </li></ul><ul><li>Issues of CG </li></ul><ul><li>Benefits of sound CG </li></ul>
  3. 3. Learning Outcomes <ul><li>Show an understanding of the concepts of ownership and accountability </li></ul><ul><li>Describe the relationship between shareholders and BOD </li></ul><ul><li>Describe categories of shareholders and corporate officers </li></ul><ul><li>Define CG and sound CG </li></ul><ul><li>Explain the benefits of sound CG </li></ul><ul><li>Describe key issues in CG </li></ul>
  4. 4. The Structure of Corporations <ul><li>Areas of coverage: </li></ul><ul><li>Definition of a company </li></ul><ul><li>Types of company </li></ul><ul><li>Ownership and control </li></ul><ul><li>Shareholders and board of directors </li></ul><ul><li>Corporate Officers </li></ul><ul><li>Board structures </li></ul>
  5. 5. The Structure of Corporations <ul><li>What is a company? </li></ul><ul><ul><li>Has “legal personality” or often described as an “artificial person” </li></ul></ul><ul><ul><li>Able to enter into contracts and make biz transactions, borrowings and own assets </li></ul></ul><ul><ul><li>Can sue and be sued in law </li></ul></ul><ul><ul><li>Perpetual succession </li></ul></ul>
  6. 6. The Structure of Corporations <ul><li>Basic types of companies: </li></ul><ul><li>1. Statutory companies </li></ul><ul><li>e.g. Petronas, SOCSO, EPF </li></ul><ul><li>2. Registered companies </li></ul><ul><li>e.g. public and private companies </li></ul>
  7. 7. The Structure of Corporations <ul><li>Continued … </li></ul><ul><li>a. Private companies </li></ul><ul><li>- very popular </li></ul><ul><li>- do not require public funding </li></ul><ul><li>- owners have full control </li></ul><ul><li>- usually operated by family members </li></ul><ul><li>- small to medium size businesses </li></ul>
  8. 8. The Structure of Corporations <ul><li>Continued … </li></ul><ul><li>b. Public listed companies (PLCs) </li></ul><ul><li>- large biz listed in Stock Exchange </li></ul><ul><li>- require public funding </li></ul><ul><li>- tend to invite the public to invest </li></ul><ul><li> money with it (IPO) </li></ul><ul><li>- regulated by various Acts and </li></ul><ul><li> government bodies </li></ul>
  9. 9. The Structure of Corporations <ul><li>Public listed companies (PLCs) are modelled after Anglo-Saxon companies </li></ul><ul><ul><ul><li>origin is from the UK (Anglo-Saxon) </li></ul></ul></ul><ul><ul><ul><li>objective is to maximise shareholder’s wealth only </li></ul></ul></ul><ul><ul><ul><li>board structure is unitary </li></ul></ul></ul><ul><ul><ul><li>shareholdings are dispersed </li></ul></ul></ul><ul><ul><ul><ul><li>Maxis Bhd. had 68,010 shareholders representing 88.46% of total shareholders and 4% of issued shares (as at 19/4/10) </li></ul></ul></ul></ul>
  10. 10. The Structure of Corporations <ul><li>Who owns PLCs? </li></ul><ul><ul><li>Members – equity shareholders </li></ul></ul><ul><li>Who manages PLCs? </li></ul><ul><ul><li>Directors } Make decisions & plan </li></ul></ul><ul><ul><li>Managers } Arrange & coordinate </li></ul></ul><ul><ul><li>Executives } Execute transactions </li></ul></ul>
  11. 11. Shareholders - Categories SHAREHOLDERS LARGE PRIVATE SHAREHOLDERS SMALL PRIVATE SHAREHOLDERS INSTITUIONAL SHAREHOLDERS CORPORATE SHAREHOLDERS
  12. 12. Shareholders - Categories <ul><li>Private </li></ul><ul><ul><li>Individual shareholders in a company </li></ul></ul><ul><ul><li>Usually, holds a small quantities of shares and have very little communication with the company </li></ul></ul><ul><ul><li>Can also hold a large quantity of shares e.g. Tan Sri Dato Sri Dr Teh Hong Piow – Public Bank Bhd </li></ul></ul><ul><li>Corporate </li></ul><ul><ul><li>Shareholders in a company that are themselves companies </li></ul></ul><ul><ul><li>As legal persons, companies may own shares in other companies </li></ul></ul>
  13. 13. Continued … Categories <ul><li>Institutional Shareholders </li></ul><ul><ul><li>Institutions holding shares of PLCs e.g. EPF, SOCSO, PNB, Insurance & Unit Trust companies </li></ul></ul><ul><li>Majority – in terms of shareholding </li></ul><ul><ul><li>A shareholder holding a majority of the equity / ordinary shares in a company i.e. owns 50% + 1 share </li></ul></ul><ul><ul><li>Has controlling interest in the company e.g. has the voting power to remove directors from the BOD – can control the board. </li></ul></ul><ul><li>Minority – in terms of shareholding </li></ul><ul><ul><li>Shareholders whose combined shareholdings are not enough to affect resolutions by the company in AGM i.e. own < 5% shares </li></ul></ul>
  14. 14. Corporate Officers <ul><li>Chairman </li></ul><ul><ul><li>Leader of the BOD </li></ul></ul><ul><ul><li>Often referred to as the ‘company chairman” </li></ul></ul><ul><ul><li>Responsible for the functioning of the board </li></ul></ul><ul><ul><li>Preferred - a non-executive director </li></ul></ul><ul><li>Chief Executive Officer / Managing Director </li></ul><ul><ul><li>The head of executive management team in an organisation </li></ul></ul><ul><ul><li>Most powerful ‘officer’ of a company </li></ul></ul>
  15. 15. Corporate Officers <ul><li>Board of Directors </li></ul><ul><ul><li>The collective group of individuals elected by the shareholders of a corporation to oversee the management of the corporation. </li></ul></ul><ul><li>Executive Director </li></ul><ul><ul><li>A director who also has responsibilities as an executive manager – a member of top management team </li></ul></ul><ul><ul><li>e.g. Marketing Director, Finance Director, Operations Director </li></ul></ul>
  16. 16. Corporate Officers <ul><li>Non Executive Director (NED) </li></ul><ul><ul><li>A director who does not have any responsibilities for executive management in the company </li></ul></ul><ul><li>Independent Non Executive Director (INED) </li></ul><ul><ul><li>A director who does not have any responsibilities for executive management in the company </li></ul></ul><ul><ul><li>Also independent from personal and biz relationship with the company or its officers </li></ul></ul><ul><ul><li>Functioning as watchdogs for shareholders </li></ul></ul><ul><li>Non Independent Non Executive Director (NINED) </li></ul><ul><ul><li>A director who does not have any responsibilities for executive management in the company </li></ul></ul><ul><ul><li>But, the director has personal or biz relationship with the company or its officers </li></ul></ul>
  17. 17. NEDs’ Sub-Categories NON-EXECUTIVE DIRECTORS (NEDs) NONINDEPENDENT NON-EXECUTIVE DIRECTORS (NINEDs) INDEPENDENT NON-EXECUTIVE DIRECTORS (INEDs)
  18. 18. <ul><li>Who has the power? </li></ul><ul><ul><li>Members – limited to voting rights </li></ul></ul><ul><ul><li>Board of directors – POWERFUL </li></ul></ul><ul><li>Why members have limited power? </li></ul><ul><li>- Separation of ownership and control </li></ul>The Structure of Corporations
  19. 19. <ul><li>Separation of ownership and control </li></ul><ul><ul><li>Ownership  shareholders – provide capital but do not manage daily operations </li></ul></ul><ul><ul><li>Control  board of directors (BOD) – makes decisions and controls operations </li></ul></ul><ul><ul><li>Shareholders delegate power and authority to BOD </li></ul></ul>The Structure of Corporations
  20. 20. Delegation of power and authority BOARD OF DIRECTORS (LED BY CHAIRMAN) BOARD COMMITTEES TOP/EXECUTIVE MANAGEMENT (LED BY CEO/MD/PRESIDENT) SHAREHOLDERS DELEGATE DELEGATE
  21. 21. <ul><li>Delegation of power and authority and control </li></ul><ul><ul><li>Ownership and control separated  shareholders (disperse) delegate power and authority to BOD; and </li></ul></ul><ul><ul><li>BOD unable to manage daily ops  delegates some decision making power to management team </li></ul></ul>The Structure of Corporations
  22. 22. The Structure of Corporations <ul><li>Board structures: </li></ul><ul><li>1. Unitary or one-tier (combine the </li></ul><ul><li>management and supervisory </li></ul><ul><li>functions) </li></ul><ul><li>e.g. UK, US, Malaysia </li></ul><ul><li>2. Two-tier: </li></ul><ul><li>a. Management board </li></ul><ul><li>b. Supervisory board </li></ul><ul><li>e.g. Germany, France </li></ul>
  23. 23. Board Structures <ul><li>1. Unitary or one-tier </li></ul><ul><ul><li>A single decision-making body </li></ul></ul><ul><ul><li>Makes all the decisions of the company </li></ul></ul><ul><ul><li>Consists of both executive and non-executive directors </li></ul></ul><ul><ul><li>Check and balance – by non-executive directors </li></ul></ul>
  24. 24. Board Structures … con’t <ul><li>Two-tier board: </li></ul><ul><ul><li>Management board </li></ul></ul><ul><ul><li>- comprises of executive directors </li></ul></ul><ul><ul><li>- makes decisions about KEY operational matters </li></ul></ul><ul><ul><li>- led by the CEO/MD </li></ul></ul><ul><ul><li>- accountable to supervisory board </li></ul></ul><ul><ul><li>Supervisory board </li></ul></ul><ul><ul><li>- monitors the management board </li></ul></ul><ul><ul><li>- makes strategic and non-operational decisions </li></ul></ul><ul><ul><li>- its chairman is also the chairman of the company </li></ul></ul><ul><ul><li>- all members are non-executive directors </li></ul></ul>
  25. 25. Defining Corporate Governance <ul><li>No standard definitions </li></ul><ul><li>Refers to the way companies are governed </li></ul><ul><li>Concerns with: </li></ul><ul><ul><li>Practices and procedures to achieve objectives </li></ul></ul><ul><ul><li>Check and balances to minimise abuse of power and fair treatment </li></ul></ul>
  26. 26. Definition … con’t <ul><li>General definition: </li></ul><ul><li>1 . Governance refers to the way in which an entity or body of people is governed and to the functions of governing </li></ul><ul><li>E.g. governance of a country </li></ul><ul><li>2. Corporate governance refers to ‘the way a corporation is directed and controlled to maximise shareholders value.’ (Cadbury, 1992) – generally accepted definition </li></ul>
  27. 27. Definition … con’t <ul><li>MCCG’s definition: </li></ul><ul><li>“ ... as the process and structure used to direct and manage business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long term shareholder value , whilst taking into account the interests of other stakeholders ” </li></ul>
  28. 28. Definition … con’t <ul><li>Our preferred explanation: </li></ul><ul><li>To describe the way corporations should be run in accordance with legal framework, rules and regulations </li></ul><ul><li>Purpose: to ensure proper compliance of laws </li></ul><ul><li>The sharing and balancing of powers between BOD and shareholders </li></ul><ul><li>Purpose: to maximise shareholders’ value by taking into account other stakeholders’ interests </li></ul><ul><li>Therefore, CG = system or processes by which a company is directed and controlled </li></ul><ul><li>Ultimate objective: to protect interests of shareholders </li></ul>
  29. 29. What is sound CG ? <ul><li>Indicates mechanisms put in place by which the owners and management have the ability to carry out their responsibilities and duties diligently </li></ul><ul><li>OR </li></ul><ul><li>Robust monitoring / oversight mechanisms put in place within and outside an organisation in order to ensure that shareholders’ wealth maximisation objective is always pursued / protected </li></ul>
  30. 30. Oversight mechanisms <ul><li>Oversight mechanisms are legal and regulatory framework, BOD, audit committee, remuneration committee, external auditors, internal control and risk management systems and shareholders </li></ul><ul><li>Purpose: to monitor the exercise of power and authority by BOD and management team </li></ul>
  31. 31. <ul><li>More important in PLCs than small private co’s </li></ul><ul><li>Why? </li></ul><ul><li>Small private co’s  director = shareholders </li></ul><ul><li>Investors need to know that their money is safe </li></ul><ul><li>Poor management  value of investment may drop & difficult to raise additional capital </li></ul><ul><li>Capital market unable to attract foreign investment – illiquid market </li></ul>The Importance of CG
  32. 32. The benefits of sound CG <ul><li>Improves company’s performance </li></ul><ul><li>- better mgmt and prudent allocation of resources </li></ul><ul><li>Empirical evidence: </li></ul><ul><li>Studies conducted by Credit Lyonnais Securities Asia (CLSA) on CG in emerging markets in 2001 found a strong correlation between higher CG rankings and superior financial ratios, higher valuations and medium-term performance </li></ul><ul><li>- Critic: Not easily verifiable due to the use of many different accounting ratios – can be manipulated </li></ul>
  33. 33. <ul><li>Enhances investor’s and market’s confidence </li></ul><ul><li>E.g. PWC / KLSE study in 2001 and Nottingham U & MSWG study 2005 and 2006 </li></ul><ul><li>Important factor for investment decisions </li></ul><ul><li>- investors place a CG premium on the amount they are willing to pay for the share </li></ul><ul><li>Empirical evidence: </li></ul><ul><li>McKinsey & Co’s Investor Opinion Survey on CG (1999 to 2000)discovered that respondents placed great importance on board practices. Also willing to pay more for shares of well-governed companies </li></ul>The benefits of sound CG
  34. 34. <ul><li>Enhance the confident of suppliers and lenders like financial institutions </li></ul><ul><li>Attract the talent to join the company </li></ul><ul><li>Gain support from the consumers </li></ul><ul><li>Improve the company image </li></ul><ul><li>Better relationship with authority </li></ul>The benefits of sound CG
  35. 35. Issues of CG <ul><li>Principal-Agent problem </li></ul><ul><li>- Separation of ownership and management, conflicts of interest </li></ul><ul><li>Financial disclosures and accountability </li></ul><ul><ul><li>- Creative accounting, ‘window dressing’ </li></ul></ul><ul><li>Directors’ remuneration </li></ul><ul><ul><li>- Luxurious perks and benefits </li></ul></ul><ul><li>Decision making powers </li></ul><ul><ul><li>- Persons empowered to pursue shareholders’ interest </li></ul></ul>
  36. 36. Issues of CG (cont’d) <ul><li>Balancing the needs of corporation </li></ul><ul><li>- Shareholders and stakeholders </li></ul><ul><li>Poor information and communication </li></ul><ul><li>- Between directors and shareholders </li></ul><ul><li>- Timeliness and accuracy of annual and financial reports </li></ul><ul><li>CG legislation and regulators </li></ul><ul><li>- Company law, Listing Requirements, Securities Commission, CCM </li></ul>
  37. 37. Issues of CG (cont’d) <ul><li>Excessive business risk taking and lack of risk control </li></ul><ul><li>- Investing without due regard on risks involved </li></ul><ul><li>- Lack of proper risk management and internal control </li></ul>

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